No sooner than California voters put one set of initiatives behind them, than the next group appears on the horizon. While the voters probably don’t think about what initiatives are coming down the road in November, policy and political types are already measuring potential effects and political consequences.
This comes to mind with the release of the Legislative Analyst’s Report on the Single Sales Factor tax formula for business. The budget agreement in February 2009 changed a business tax formula used to calculate taxes on California businesses that also operate in other states. The current formula considers a firm’s sales, property and payroll. Under the budget agreement, starting in 2011, businesses will have the option of considering only their sales in determining their California taxes.
Business pushed for this change because the business community argued basing taxes on sales would create economic growth.
In response to this reform, The California Teachers Association filed an initiative to stop the change from taking effect in 2011. The union says the change will cost the state billions over time in needed revenue.
However, if California is to dig its way out of its deficit predicament, state policy has to encourage economic growth. The Legislative Analyst Office’s study did not consider the repeal attempt by the initiative, only the policy as passed by the legislature.
According to the study, using a tax formula that puts greater weight on sales and lower weights on property and payroll promotes job growth to some extent. Further, the report says most states use the sales formula only, thus disadvantaging California businesses if it holds on to the old tax formula.
The LAO report suggests that when states use different formulas, firms have an incentive to locate their facilities in states that put more weight on sales and sell into states that put more weight on property and payroll.
The report states that, "the evidence suggests that increasing the weight of the sales factor produces a small but noticeable increase in economic activity."
When job creation is the goal to build a sound economy, switching to a formula that would encourage building facilities within the state, which in turn, means more jobs, seems a solid policy decision. That was the thinking behind the 2009 budget reform.
California with its 12.6% unemployment rate needs all the help it can get in creating new jobs.